The 161 fib level drawn off of the topping swing after a strong move up gives us a very useful downside level to watch. It's a place where bulls are are prone to come back in and make a low in a trend and where bears can be really strong after being able to break it. The optimal trade to look for when trading a bearish trend continuation strategy is a bounce from the 161 (There can be small false breaks under it first) and then look for shorting opportunities into the rally.
The overall system stop on this would be above the high (Because when you're trading a bearish trend continuation and it's above the high you started doing that, it's not working) and better high risk:reward entries can be taken using different retracement rules with confluence in the form of classic reversal patterns (Or other matching support/resistance levels).
This strategy can be very efficient in a down-trending market, a correcting bull trend and a reversing bull trend. When trading against a bull trend this is always liable to create false signals (Since a 161 will hold as the big low support often and you'll be shorting into the new breakout). We think the best way to compensate for this risk is taking various small stop outs on the way up, reducing the net amount of loss in the swing (Relative to being stopped out above the high) and having increasing risk:reward trades that can get up to 1:10 from the last entry zone (Covering the possible 3 to 4 losses).
This means in the bull trend we lose less (More trades stop out, but if all the new short entries are higher this is a loss we skipped and a position we improved) and in the times we hit the trade with one of the early attempts there are big 1:5 or more pay-offs on it. While the percentage of times that happens in a bull trend is going to be 0%, it's very much higher in the times the market has made a valid break and is in a bull trap rally. These trades more than compensate for the previous losers - especially if a trend develops and this can be done multiple times on small timeframes along the way.
The overall system stop on this would be above the high (Because when you're trading a bearish trend continuation and it's above the high you started doing that, it's not working) and better high risk:reward entries can be taken using different retracement rules with confluence in the form of classic reversal patterns (Or other matching support/resistance levels).
This strategy can be very efficient in a down-trending market, a correcting bull trend and a reversing bull trend. When trading against a bull trend this is always liable to create false signals (Since a 161 will hold as the big low support often and you'll be shorting into the new breakout). We think the best way to compensate for this risk is taking various small stop outs on the way up, reducing the net amount of loss in the swing (Relative to being stopped out above the high) and having increasing risk:reward trades that can get up to 1:10 from the last entry zone (Covering the possible 3 to 4 losses).
This means in the bull trend we lose less (More trades stop out, but if all the new short entries are higher this is a loss we skipped and a position we improved) and in the times we hit the trade with one of the early attempts there are big 1:5 or more pay-offs on it. While the percentage of times that happens in a bull trend is going to be 0%, it's very much higher in the times the market has made a valid break and is in a bull trap rally. These trades more than compensate for the previous losers - especially if a trend develops and this can be done multiple times on small timeframes along the way.